Chapter 14 Firms in Competitive Markets Multiple Choice True False

Chapter 14/Firms in Competitive Markets ❖ 89 TRUE/FALSE 1. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive 2. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive 3. If a firm notices that its average revenue equals the current market price, that firm must be participating in a competitive market. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive 4. For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Applicative 5. A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive 6. A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive 7. Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price. ANS: T PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 8. In competitive markets, firms that raise their prices are typically rewarded with larger profits. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 90 ❖ Chapter 14/Firms in Competitive Markets 9. When an individual firm in a competitive market increases its production, it is likely that the market price will fall. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 10. When an individual firm in a competitive market decreases its production, it is likely that the market price will rise. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 11. In a competitive market, firms are unable to differentiate their product from that of other producers. ANS: T PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 12. Firms in a competitive market are said to be price takers because there are many sellers in the market, and the goods offered by the firms are very similar if not identical. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 13. The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated. ANS: F PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 14. Firms operating in perfectly competitive markets try to maximize profits. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 15. Because there are many sellers in a competitive market, individual firms are unable to maximize profits. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 16. A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin. ANS: T PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 17. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 18. Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative Chapter 14/Firms in Competitive Markets ❖ 91 19. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses). ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 20. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses). ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 21. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more than 100 units in order to maximize its profits (or minimize its losses). ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 22. All firms maximize profits by producing an output level where marginal revenue equals marginal cost; for firms operating in perfectly competitive industries, maximizing profits also means producing an output level where price equals marginal cost. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 23. When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 24. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average total cost but greater than the firm’s average variable cost. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 25. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average variable cost but greater than the firm’s average fixed cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 26. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average variable cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 27. A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the market price is less than that firm’s average variable cost. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 92 ❖ Chapter 14/Firms in Competitive Markets 28. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 29. The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 30. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 31. Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and exiting an industry in the long run. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 32. Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and shutting down in the long run. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 33. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 34. A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm’s average total cost; otherwise, the firm will shut down. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Applicative 35. In the short run, if the market price is below the firm’s average total cost of production, the firm will always shut down. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 36. The marginal firm in a competitive market will earn zero economic profit in the long run. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 37. A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive Chapter 14/Firms in Competitive Markets ❖ 93 38. A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 39. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when its total revenues exceed its variable costs. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 40. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when its total revenues exceed its fixed costs. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 41. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk. ANS: F PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 42. Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 43. The manager of a firm operating in a competitive market can ignore sunk costs when making business decisions. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 44. In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 45. In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 46. In the long run, a firm should exit the industry if its total costs exceed its total revenues. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 47. A competitive firm’s profit will be increasing as long as marginal revenue is greater than marginal cost. ANS: T PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 94 ❖ Chapter 14/Firms in Competitive Markets 48. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 49. A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because it is likely to be earning positive accounting profits. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 50. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 51. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the short run. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 52. A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero because it is likely to be earning negative accounting profits. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 53. A firm operating in a perfectly competitive market earns zero economic profit in the long run but remains in business because the firm’s revenues cover the business owners’ opportunity costs. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 54. A competitive market will typically experience entry and exit until accounting profits are zero. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 55. The long-run equilibrium in a competitive market characterized by firms with identical costs is generally characterized by firms operating at efficient scale. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 56. In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive Chapter 14/Firms in Competitive Markets ❖ 95 57. In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are making a positive economic profit. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 58. When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity costs. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 59. The stable, long-run equilibrium in a competitive market occurs when the market price equals the lowest point on a firm’s average total cost curve. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 60. All competitive firms earn zero economic profit in both the short run and the long run. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Profit | Short run | Long run MSC: Interpretive 61. When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward sloping. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 62. The short-run supply curve in a competitive market must be more elastic than the long-run supply curve. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 63. The long-run supply curve in a competitive market is more elastic than the short-run supply curve. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 64. If some resources used in the production of a good are only available in limited quantities, then the long run market supply curve will be perfectly elastic. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive